This is the second article we are posting on the subject of living in Spain but working for a foreign company. The first article explained the situation in Spain for a normal employment. Please also check out the first few paragraphs of this article that explain when a person is tax resident in Spain.
We are now going to examine the case of working for a foreign company you own. By this we mean you either own all the shares of the company that pays you a salary, or at least a significant proportion =>25%.
We will introduce the subject by first explaining that the Spanish tax system attempts to eliminate any tax saving advantage that might be gained from receiving dividends instead of salary, and vice versa. The tax office uses all its power to enforce this proinciple, sometimes in surprsing ways.
In other countries, it may be possible to obtain tax savings by having a low salary and high dividend income. Not so in Spain. In fact, expats arroving in Spain should assume that wharever strategies they have usefully employed in other countries will not work in Spain.
And there are other problems too.
Is the foreign company truly foreign?
This may seem like a strange question but Spanish tax law explicitly states that a company shall be subject to Spanish taxes if it is managed and controlled in Spanish territory.
So, if there is no physical activity outside Spain and the services provided by the employee are the same as the primary activity of the company, there is a strong risk that the foreign company could be deemed to be a Spanish trading entity and thereby be subject to Spanish Corporation Tax. This risk arises from the linkage between the shareholder’s Spanish tax residency status and the company’s operations in Spain.
So good luck to anyone who lives in Spain and is the sole shareholder, director and employee of a foreign company and is trying to pursuade a tax inspector that the company is not tax resident in Spain!
If this risk exists then it would be advisable to consider liquidating/striking off the foreign company. The shareholder could then register as self-employed and invoice clients directly without the involvement of a foreign company.
Alternatively, if maintaining the foreign company for client invoicing, maintaining a long established image or brand, or necessary for marketing purposes, and this can be demonstrated objectively, then the company could continue but the shareholder/director should register as a Spanish self-employed individual. In this case the shareholder/director should invoice at least 75% of the company’s profits, while the company continues to invoice clients.
In this scenario:
- Social Security contributions would be made in Spain under the self-employed regime. This makes snes anyway as, if you live in Spain, you would probably want Spanish medical cover and benefits, and Spanish Social security contributions are usualy capable of being added to pension rights payable by other countries (certainly for UK/EU/EEA)
- PAYE (Pay As You Earn) in the foreign company would not apply as the shareholder would not be an employee but would invoices their own company.
- Dividends would almost certainly not be advantageous unless the company generates a substantial income (at least 100.000€ p.a.). Dividends in Spain are subject to income tax from the first Euro. Remember that in order to pay dividends, a company has to make a taxable profit and pay corporation tax. Adding together corporation tax plus dividend tax often exceeds the Spanish income tax rate on earned income.
For some businesses, having limited liability is essential to protect the shareholders personal assets and being self-employed would be dangerous. In this case, having a company would make sense but not necessarily a foreign company, unless of course, there is a real business with premises and employees in the foreign country.
Indeed, having a business with substance based in a foreign country should be capable of being insulated from the Spanish system altogether, as long as matters are carefully arranged.
How do taxes and Social security work for the self-employed?
As explained, having a foreign company may require you to regsiter as a self-employed person in Spain. Being a self-employed person in Spain, taxation involves several requirements:
- Social Security Contributions: Self-employed individuals in Spain are required to make monthly Social Security contributions, which typically range from 230 to 540 euros, depending on net income (income minus expenses without deducting Social Security). There’s a special regime applicable for the first year of self-employment, with a reduced rate of 85 euros.
- Income tax: Involves quarterly income tax filings and paying 20% of your net income. These payments are on account of your annual income tax charge which is calculated in your annual tax return which would also include income from all other worldwide sources.
For more details please see this comprehensive guide for the self-employed.
